Fractional Money Multipliers

Money multipliers - the stock of money divided by a measure of base money (generally reserves plus currency in circulation) - are dwindling to fractions of what they used to be. FT Alphaville draws our attention to this fact on the Euro area (EA) using SocGen's analysis. The money multiplier is a representation of base money (generally reserves plus currency in circulation) - are dwindling to fractions of what they used to be. FT Alphaville draws our attention to this fact on the Euro area (EA) using SocGen's analysis. The money multiplier is a representation of how much credit is leaving the banking system via lending and growth (or inflation) enhancing monetary activities.

Specifically, I don't agree with SocGen's estimates that the EA money multiplier drops in December to roughly 6. Given that December 2011 EA base money has been published, a 6.2 M3 multiplier implies that M3 dropped by 15% in 1 month. That's unlikely.

To my readers: There's a 92% probability that I'll be serving on a grand jury for the next three months. Since I'll need to keep up with all matters EA, I'll probably be blogging at a higher frequency and in less depth (like this one).

Rebecca Wilder

Source data: The Federal Reserve publishes money supply and monetary base data, which can be easily downloaded at the St. Louis Fred database. ECB data can be found here and here.